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Sunday, December 24, 2006

Fundamentals of FOREX capital control (the end)

7. Defining the ratio between possible profit and losses.

For each potential deal the rate of profit is defined independently. Then this rate should be balanced with the potential losses in case if the market goes in the wrong direction. Usually this ratio is 3 to 1. Otherwise you should forget about entering the market. For example, if the trader estimates the risk from the deal as $100, then the potential profit should be $300.

Since only few deals throughout the year can be profitable, it’s essential to get the maximum profit mainatining the positions as long as possible. On the other hand, it’s necessary to minimize the losses from bad deals.

8. Trading with a few positions.

When entering the market with several contracts (i.e. entering into a contract for more than one lot), the trader should divide them into the so-called trend and trading positions. Trend positions are carried out with quite liberal stop-orders that let keep these positions even in the conditions of price consolidation and correction. These positions give the trader the possibility to get the biggest profit. Trading positions are meant for short-term trading and are limited by quite hard stop-orders. Consequently, after reaching certain price points they are closed and after tendency reopening they are recovered.

9. Conservative and aggressive approaches to trading

Most analytics prefer the conservative approach. For example, Trevels, Harlow and Stone in their book "Play on the commodity futures markets" write:

"... the trader, who has the worst possibilities for getting profit but who observes the conservative style of trading, is likely to achieve long-term success more quickly than the trader who has more possibilities for getting success but who plays aggressively".

10. Rules for opening a position:

a) open a position only having one main and one (not less) additional signal;

b) before opening a position formulate and put down the following things in advance:

·the price when entering the market;

·the price at which the profitable position is closed;

·the price at which the unprofitable position is closed;

·the estimated time of the open position “life”.

c) open against the trend carefully and for a short time;

d) open carefully and for a short time during the flat.

11. Rules for maintaining a position and partial closing before the estimated time:

a) maintain the positions only if the analysis proves the conclusions made before;